As we look ahead to the end of 2023, there are multiple global events that will decide the trajectory of the Indian and global economy for 2024 and beyond. The US Fed Meeting and the RBI Monetary Policy Meet in December being two such key events. Defining our expectations for these events, we also look at why the IT sector could see a recovery in time to come.
US Treasury borrowings and the impact of the Long-term bond yield
The recent positive CPI Data suggests that the US Economy is on the track to recovery with the Fed now expected to deliver a positive commentary come its December meeting. However, this is not the only reason why the Fed needs to lower the interest rate burden on the economy.
US treasury borrowings have been reaching all-time highs post the peak it made during the pandemic. As the following graph illustrates, the borrowings made by the public as a percentage of GDP has remained high and has shown a uptick in the last few months. This entails that due to the high interest rates, these borrowings are not being utilized towards areas of growth – and so, it is necessary to bolster consumption and investment to prevent the induced growth slowdown.
Therefore, it is important that the upcoming Fed meet sets optimistic expectations for the time to come even if the interest rates are not decreased. As for the RBI policy meeting, it will happen 5 days before the Fed meet, and so even though inflation has been largely stable in India over the last few months, we should not expect a rate cut or a highly optimistic stance from the RBI, given that the Fed would be yet to set expectations for the coming year. With the INR/Dollar volatility being the lowest it has in the last 25 years, we expect a neutral stance from the RBI.
Contextualizing P/E Ratios in the Indian Markets
Often the current discourse has spoken about the fact that the Indian markets are grossly over-valued and that a correction is imminent. The example cited to justify such ideas often includes comparing India to other economies, however we must remember that India is an emerging economy and that the Nifty 50 has continued to deliver returns at a 14.5% CAGR over the last 22 years.
It is apparent that the P/E ratio has in fact stabilised post the pandemic and when compared to an economy like Japan which boasts of an exorbitant price for comparatively less returns, India has remained consistent despite the global growth slowdown and the valuation race.
With India positioned well to continue growing despite global challenges, and with US interest rates seeing a downward trajectory, a much-vaunted recovery in the IT sector is imminent. As Indian IT companies continue to make the shift to technology to remain relevant, and demand for their services continues to be present, it would be a safe bet as an investor to look favourably upon a sector that has been the backbone of Indian Equity Markets in the past and will continue to be so.
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